Capital Structure under Systemic Shocks: How COVID-19 Reshaped SME Financing

Abstract

This study examines how the COVID-19 crisis reshaped the determinants of capital structure among Portuguese industrial small and medium-sized enterprises (SMEs). Using firm-level and macroeconomic data from 7,006 SMEs over 2016–2023, we estimated a fixed-effects panel model with robust standard errors. Before the pandemic, profitability, liquidity, and maturity were negatively associated with leverage, whereas size and asset tangibility increased debt financing, broadly supporting Pecking Order Theory. The findings show that the pandemic reshaped the determinants of SME financing rather than aggregate debt levels, revealing an adaptive response to systemic uncertainty. The study extends capital structure research in bank-based economies and provides implications for financial and regulatory policies supporting SMEs during systemic crises.